Fiscal Cliff or More of a Fiscal Pothole?

Based on all the heated partisan talk of the so-called “fiscal cliff,” you could be forgiven for thinking that this precipice of tax-hike-and-spending-cut doom was a five mile drop straight to the bread lines for the majority of American taxpayers and businesses. Ezra Klein and his staff over at Wonkblog (check out posts from Ezra Klein and Suzy Khimm for details) have done a good job of getting across the alternate (and maybe more realistic) idea of a “fiscal slope.”  If you’re feeling really nerdy, check out the original paper Ezra and Co. cited from the Center on Budget and Policy Priorities. The basic idea is that the U.S. economy won’t drop into free fall come January or February of 2013. The expiration of the Bush era tax cuts won’t start having an effect until people file their 2013 taxes – sometime between January and April of 2014. The spending cuts don’t all come at once either. They’re spaced gradually over 2013 and the following years. So, not a sheer economic drop – more like a 45-degree hillside. It’d still be bad and the U.S. economy would probably wind up in recession, but it’s not falling into an abyss at 1,000 miles an hour.

I’d propose another alternate theory; it’s something that our economic committee (EC) has been talking about – the “fiscal pothole.” The fiscal pothole sits in the road, slightly before you get to the fiscal slope. Think about it this way – you hit a pothole in your car and, sure, it’s not great for the suspension, but you don’t come to a complete stop and you’re a little more careful afterwards.

Unlike Wonkblog, we’re not postulating the effects of what would happen if all the spending cuts and tax increases go into effect.  We’re thinking more along the lines that the economy wouldn’t get as far as the fiscal slope. As our EC has written elsewhere, if Romney wins, it’s likely that Republicans will retain control of the House. In that case, problem solved – Bush tax cuts get reinstated for everyone and entitlement spending gets chopped. If Obama wins, there’s a chance the Democrats get the House back. Here too, problem solved – Bush tax cuts extended for the middle class, erased for the wealthy, and health care reform goes on apace. The problem comes when Obama wins and the GOP keeps the House, which is where we’re at now. With both parties staring down the barrel of a recession, we figure it’s likely that they’d come up with some sort of short-term agreement that requires concessions from both sides. It’d be jarring and mildly unpleasant for all involved (like a pothole), but the government and the economy would muddle on…at least until the debate starts up again for the debt-ceiling renewal.

My fantasy is that the threat of the fiscal slope forces the parties to hammer out meaningful fiscal reform (in my opinion – that means carefully thought out tax increases and spending cuts).  But in the fiscal-pothole scenario, they could do the easy thing and just kick the can down the road ‘til 2014.